Wednesday, August 23, 2017

FW: RHB FIC Rates & FX Market Update - 23/8/17

23 August 2017

Rates & FX Market Update

Marginal Movement on IndoGB and IDR despite BI's Surprise Rate Cut

Highlights

¨Global Markets: Peripheral EGBs underperformed their core counterparts yesterday, with losses on peripheral EGBs skewed towards the longer end of the curve as expectations for ECB to shift incrementally towards a hawkish stance spurred investors' repositioning ahead of ECB's Draghi Jackson Hole speech. Eye Manufacturing and Services PMI data out of EU later today, with strong expansions likely to further buttress expectations of the economic recovery, fuelling the prospect of a medium term policy normalisation next year; keep a neutral duration view on EGBs.

¨AxJ Markets: Malaysia's foreign reserves climbed past the USD100bn mark for the first time since 2015, edging higher to USD100.4bn (+USD1bn m-o-m) which is sufficient to finance 7.9 months of retained imports and 1.1x of short-term external debt. Despite so, we expect no change to BNM's OPR for the rest of the year, underscoring our neutral view on MYR over the medium term. Additionally, abetting strength on USD buoyed modest gains on MGS yesterday, registering c.1bp gains across the curve; relative value on MGS vs regional bonds likely to remain supportive of MGS, where we continue to recommend a neutral duration over the coming months.

¨BI surprised investors with a 25bps rate cut yesterday, bringing the benchmark rate lower to 4.50% after keeping it on hold for 9 consecutive months. The Central Bank has cited (i) stability on IDR and manageable current account deficits, (ii) decelerating inflationary pressures, and (iii) the gradual pace of FFR hikes, as conditions that supported increased monetary policy manoeuvrability. With incremental concerns of financial stability across the region, we see prospects of further BI rate cuts to be limited, with expectations for BI keeping rates on hold for the year. Movements on USDIDR remained marginal this morning, with the pair holding at the 13,350 handle where we expect the pair to inch higher towards the 13,500 mark over the medium term; keep a neutral view on IDR.